As you know, GDP measures the value of all the goods and services produced in Australia during a period. But this includes goods and services produced by foreign companies, so the profits made by those foreign companies in Australia belong to foreigners, not us.
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Australians’ savings have always been insufficient to finance all the investment opportunities in the Wide Brown Land, so since white settlement we’ve gone on inviting foreigners to bring their savings and expertise to Oz and help us develop the place. We’ve ended up with a lot of foreign ownership of our economy.
That’s why GNP/GNI is the better measure of our economy. It measures the value of the goods and services produced by Australian citizens. It’s our bit of our economy. But that’s why GDP is bigger than GNP/GNI – although the two probably grow at much the same rate.
Historically, foreign investment in Australia is the big story. In recent decades, however, we’ve had investment going the other way: Australians investing in overseas businesses. That’s particularly the case since the introduction of compulsory superannuation in 1992. Rather than swamp the local share market, about half our total superannuation savings of $4.1 trillion is invested offshore.
So GNP/GNI is GDP minus income paid to foreigners, but plus foreign income paid to Australians. Combine those last two and you get NFI – net foreign income.
It’s after allowing for net foreign income that Murphy’s estimate of real GDP being 0.4 per cent higher turns into real GNI being only 0.2 per cent higher. But here’s the point: under the CoPS modelling, higher real GDP of 0.2 per cent turns into real GNI being 0.3 per cent lower. This translates as Australians being less prosperous by almost $300 a person.
How does that come about? It’s because Murphy’s model is “comparative static” whereas CoPS’ model is “dynamic”. Murphy compares the state of the economy before the tax change with its expected state after it has returned to equilibrium over the “long run” (about 20 years in this case).
In contrast, the CoPS dynamic model traces the economy’s path year by year between the pre-change equilibrium and its return to a new equilibrium X years later. But why should this approach suggest that the company tax cut would leave Australians worse off rather than better off?
Well, the first thing to remember is that Australia’s rare system of “dividend imputation” (franking credits) makes our story very different to most other countries. Because the Australian shareholders in an Australian company get a tax credit for their share of the company tax their company paid, they don’t have to care what the rate of company tax is.
So it’s really only the foreign shareholders in Australian companies who end up paying company tax. Thus, if we were to cut our company tax rate from 30 per cent to 20 per cent, it’s really only foreign shareholders who’d benefit.
Prime Minister Anthony Albanese and Treasurer Jim Chalmers at the opening of the Economic Reform Roundtable.Credit: Dominic Lorrimer
And, as the CoPS people point out, cutting the company tax rate by 10 percentage points would deliver a massive windfall gain to the foreign owners of Australian companies. They were perfectly happy to invest in Australian companies when the tax rate was 30 per cent, but we cut it anyway.
And if foreign investors are paying less tax to our government, that leaves Australians bearing more of its costs. That’s true even if the lower company tax rate were to induce foreigners to invest more in Oz. We’d start with a big minus before we got any pluses.
But if our company tax rate is so high, how come foreigners have always been happy to invest here? Because we’re a highly attractive investment destination for many obvious reasons. Other countries may need to offer a low tax rate to attract the foreign investment they need, but we don’t.
